Recently, the exchange rate of the Korean won against the U.S. dollar has continued to decline, reaching critical levels and raising significant attention in the market regarding the potential for the National Pension Service of South Korea to initiate large-scale foreign exchange hedging. Informed sources have revealed that if the average closing rate exceeds 1,450 won per dollar for five consecutive trading days, the pension fund will implement strategic hedging measures, potentially selling up to $50 billion in foreign exchange.
Trigger Mechanism for Won Depreciation
It is reported that as of the end of September, the foreign currency assets of the National Pension Service totaled $485.5 billion. Its internal mechanisms mandate that when the exchange rate deviates significantly from the long-term average of over 20 years, there is a duty to hedge up to 10% of its foreign exchange assets. As of Wednesday, the won had fallen to its lowest level against the dollar since 2009, triggering the fund's internal hedging alert.
Sources indicate that once the hedging strategy is activated, the fund's foreign exchange sales will continue unless there is a significant rebound in the won. Meanwhile, the fund has been purchasing $2 to $3 billion in foreign exchange monthly, which may turn into net sales in the future. This change is expected to ease downward pressure on the won but may also cause volatility in the foreign exchange market.
Market Reaction and Pressure
Influenced by hawkish signals from the U.S. Federal Reserve, global market sentiment has turned cautious, with the won losing 1.1% against the dollar in the Seoul market, quoted at 1,451.90. The Korean stock market is also under pressure, with electronics and internet sectors leading declines. Samsung Electronics and SK Hynix fell by 3.3% and 4.6%, respectively, while mobile internet platform company Kakao Corp. dropped by 5.1%. These declines echo the overnight drop in U.S. chipmaker Micron Technology's stock price.
The won has been weak this year, with an annual decline of over 11%, making it one of the weakest currencies in Asia. This situation is partly due to the strengthening of the dollar and political uncertainties within South Korea, including market unease triggered by the impeachment of the President.
Responses from the Government and Central Bank
Facing depreciation pressure, the South Korean government and central bank have announced various measures to stabilize the market. The governor of the Bank of Korea noted that although the dollar/won exchange rate has risen, there are no signs of crisis in the current forex market, so there are no plans to call a special meeting to cut rates. However, the central bank will continue to closely monitor market dynamics and intervene if necessary to control exchange rate fluctuations.
Meanwhile, South Korea's Finance Minister stated that all available resources will be used to actively respond to excessive fluctuations in the foreign exchange market to ensure stable economic operation. He also noted that with domestic political processes gradually stabilizing, there is room for the dollar/won exchange rate to decline, which will aid in improving market sentiment.
Future Outlook
Analysts believe that the foreign exchange sale strategy of the National Pension Service could be a significant determinant of the won's trajectory. If large-scale forex hedging is initiated, it might relieve short-term devaluation pressure, but long-term impacts remain to be seen. Additionally, external factors such as the Federal Reserve's policy direction, dollar strength, and global economic conditions will continue to significantly influence the won and the South Korean economy.
In this context, markets will closely watch further policy developments from the Korean central bank and government, as well as specific actions regarding the management of foreign exchange assets by the pension fund. This foreign exchange volatility involving the won is expected to unfold with more developments and interpretations in the coming weeks.
